A notice period, in simplest words, is the time you need to serve with an organization post-resignation to allow the recruiter the time to hire someone to replace you to ensure a smooth transition.
However, if you leave the job and don’t severe the mandatory notice period you are liable to pay the employer from your side, which has always been a rule.
But now, if you leave your job and don’t get paid for the notice period, yet TDS will be deducted on your full month’s salary. This is because under the Income Tax Act, salary income is taxable on a due basis or receipt basis, whichever is earlier. So, even if you haven’t received the salary for the unserved notice period, you will have to pay income tax on it.
For example, if as per the company rule, you need to serve a 1-month notice period, but you only served 15 days notice. So now, the employer will deduct 15 days’ salary from your full and final settlement. But the TDS levied on the settlement will be on the full month’s salary basis and not 15 days.
“Under the Income-tax Act, salary income would become taxable once it becomes due regardless of whether it has been actually paid to an employee or not. And typically, when an employee resigns but does not serve out the notice period (provided for in the employment agreement), the employer deducts salary in lieu of this period. However, it is generally seen that the Income-tax authorities do not consider such deduction and seek to tax the entire salary due in the hands of the employee (i.e. salary before allowing for such deduction),” said Parizad Sirwalla, partner and head, global mobility services, tax, KPMG in India
“There is no provision under the Income-tax Act, 1961 to allow deduction of noticepay forfeited by the employer when an assessee-employee leaves his job, without serving during notice period. In the case of NandinhoRebello v. DCIT [2017] 80 taxmann.com 297 (Ahmedabad – Trib.),the Tribunal also held that only actual salary received by an employee shall be taxed in his hands. It is a rational decision by the Tribunal as an individual should only be taxed on the amount he has actually earned and received,” said Naveen Wadhwa, deputy general manager, Taxmann.
However, as per reports, some experts are in the belief that employees can claim a refund of the aforementioned TDS deducted, However that would need clarity on the income tax act and rules.
“In one of the judicial ruling, the Ahmedabad Appellate Tribunal has held that only the actual salary received by the taxpayer, net of recovery of the contractual notice period pay, would be taxable, as the notice pay amount never become due to the employee as per terms of employment agreement. Thus, depending upon the facts and circumstances of each case, a taxpayer may take reliance on this ruling and claim a refund in case tax has been deducted by the employer on the full salary in lieu of the notice period. That said, the possibility of tax authorities disputing such interpretation cannot be ruled out,” said Sirwalla.
Includes inputs from Livemint
